Freelance and contractor income in Australia is taxed as ordinary income — at the same progressive rates as wages — but the collection mechanism is different. No tax is withheld from your invoices unless you have a voluntary withholding arrangement. This means you are responsible for setting aside money for tax and managing your own obligations with the ATO.
How Freelance Income Is Taxed
Freelance income is assessed as business income or personal services income (PSI) depending on your circumstances. Either way, it is included in your annual tax return and taxed at the standard resident rates after allowable deductions.
You do not get a refund at tax time just because no tax was withheld during the year — your annual return simply calculates what you owe based on total income and deductions.
Key principle: The same progressive rates apply:
| Taxable Income | Rate |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 19% |
| $45,001 – $135,000 | 32.5% |
| $135,001 – $190,000 | 37% |
| $190,001+ | 45% |
Plus the 2% Medicare levy.
ABN and How to Invoice
As a freelancer or contractor, you need an Australian Business Number (ABN) to operate commercially. You obtain one free through the Australian Business Register at abr.gov.au.
With an ABN, you can:
- Issue invoices to clients
- Claim business deductions
- Register for GST when turnover hits $75,000
When a client pays an invoice, no tax is withheld from the gross amount — you receive the full amount and manage your tax separately.
Exception: If you do not quote your ABN on an invoice, the client is legally required to withhold tax at the top rate (45%) and remit it to the ATO — known as no-ABN withholding.
GST Registration
If your annual turnover (gross income from business activities) reaches or is likely to reach $75,000, you must register for GST. Once registered:
- Add 10% GST to your invoices
- Lodge a Business Activity Statement (BAS) quarterly or monthly
- Remit net GST to the ATO (GST collected minus GST paid on expenses)
Below $75,000, GST registration is optional. Many freelancers choose not to register if they work predominantly for private individuals who cannot claim the GST back.
See GST Explained and When to Register for GST.
PAYG Instalments for Freelancers
Once your tax return shows a tax liability above the threshold, the ATO will enrol you in PAYG instalments — quarterly pre-payments of expected income tax. This avoids a large lump-sum bill when you lodge.
See PAYG Instalments Explained.
In the meantime, while you are not yet in the instalment system (typically in your first year of freelancing), you should set aside approximately 25–30% of your gross income in a separate account to cover your tax liability when you lodge.
Business Deductions for Freelancers
As a sole trader or contractor, you can claim business-related expenses as deductions:
- Home office — fixed rate (67c/hour) or actual costs for the portion of your home used exclusively for work
- Equipment and tools — laptops, cameras, software — immediate deduction for items under $300, or depreciation above
- Phone and internet — the work-related proportion
- Professional development — courses, conferences, subscriptions
- Business insurance — professional indemnity, public liability
- Accounting and bookkeeping fees — fully deductible
Expenses must be genuinely incurred in earning your income. Mixed-use items require apportionment.
Personal Services Income (PSI) Rules
If more than 50% of your income comes from your personal skills, knowledge, or effort (rather than a business structure providing equipment, employees, or intellectual property), your income may be classified as Personal Services Income (PSI). PSI rules limit the deductions you can claim and prevent income splitting into a company or trust solely to access lower tax rates.
Most freelancers working for themselves with no employees are subject to PSI rules. Key restrictions include:
- Cannot split income with a spouse or family member
- Cannot deduct rent or mortgage payments for a home office beyond standard amounts
- Cannot deduct payments to associates (family) for services
A Personal Services Business (PSB) test may allow some freelancers to escape PSI restrictions. This is a complex area — professional advice is recommended if your contracting income is significant.
Frequently Asked Questions
Do I need to register for GST as a freelancer? Only once your annual turnover reaches $75,000. Below that threshold, registration is optional. If your clients are businesses that can claim GST credits, they may prefer you to be registered.
How much should I save for tax as a freelancer? As a rough guide, setting aside 25–30% of your gross income covers most people’s tax obligations. If your income is higher or you have additional investment income, set aside more. Once the ATO enrolls you in PAYG instalments, the amounts are specified quarterly.
Can I operate as a company to pay less tax? The company tax rate (25% for small companies) is lower than the top personal marginal rate, but the income is still taxed again when distributed to you as dividends (though franking credits offset some of this). The decision to incorporate depends on your income level, reinvestment plans, and personal circumstances. Advice from an accountant is strongly recommended.
What records do I need to keep? Keep records of all income (invoices, receipts of payment) and all business expenses (invoices, receipts, bank statements). Records must be kept for at least five years from the later of when you lodge the relevant return or when a tax assessment is made.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent or accountant. Find one through the Tax Practitioners Board register.